AnalysisBeyond GDP: Measuring and achieving global genuine progress
Introduction
Nations need indicators that measure progress towards achieving their goals—economic, social, and environmental. Standard economic indicators like gross domestic product (GDP) are useful for measuring just one limited aspect of the economy—marketed economic activity—but GDP has been mistakenly used as a broader measure of welfare (Costanza et al., 2009, Stiglitz et al., 2010). GDP was never designed to measure social or economic welfare, and yet, today, it is the most commonly used indicator of a country's overall performance (Kuznets, 1934, Marcuss and Kane, 2007, McCulla and Smith, 2007).
GDP's current role poses a number of problems. A major issue is that it interprets every expense as positive and does not distinguish welfare-enhancing activity from welfare-reducing activity (Cobb et al., 1995, Talberth et al., 2007). For example, an oil spill increases GDP because of the associated cost of cleanup and remediation, but it obviously detracts from overall well-being (Costanza et al., 2004). GDP also leaves out many components that enhance welfare but do not involve monetary transactions and therefore fall outside the market. For example, the act of picking vegetables from a garden and cooking them for family or friends is not included in GDP. Yet buying a similar meal in the frozen food aisle of the grocery store involves an exchange of money and a subsequent GDP increase. GDP also does not account for the distribution of income among individuals, which has a considerable effect on individual and social well-being (Wilkinson and Pickett, 2009).
A more comprehensive indicator would consolidate economic, environmental, and social elements into a common framework to show net progress (Costanza et al., 2004). A number of researchers have proposed alternatives to GDP that make one or more of these adjustments with varying components and metrics (Smith et al., 2013). Some have also noted the dangers of relying on a single indicator and have proposed a “dashboard” approach with multiple indicators.
One such alternative indicator that has been commonly used is the Genuine Progress Indicator (GPI). While GDP is a measure of current production, the GPI is designed to measure the economic welfare generated by economic activity, essentially counting the depreciation of community capital as an economic cost. The GPI is a version of the Index of Sustainable Economic Welfare (ISEW) first proposed in 1989 (Daly and Cobb, 1989). However, for the purposes of this paper we use GPI and ISEW interchangeably. GPI starts with Personal Consumption Expenditures (a major component of GDP) but adjusts them using 24 different components, including income distribution, environmental costs, and negative activities like crime and pollution, among others. GPI also adds positive components left out of GDP, including the benefits of volunteering and household work (Talberth et al., 2007). By separating activities that diminish welfare from those that enhance it, GPI better approximates sustainable economic welfare (Posner and Costanza, 2011). GPI is not meant to be an indicator of sustainability. It is a measure of economic welfare that needs to be viewed alongside biophysical and other indicators. In the end, since one only knows if a system is sustainable after the fact, there can be no direct indicators of sustainability, only predictors (Costanza and Patten, 1995).
Past national GPI studies have indicated that in many countries, beyond a certain point, GDP growth no longer correlates with increased economic welfare. An important function of GPI is to send up a red flag at that point. Since it is made up of many benefit and cost components, it also allows for the identification of which factors increase or decrease economic welfare. Other indicators are better guides of specific aspects. For example, Life Satisfaction is a better measure of overall self-reported happiness. By observing the change in individual benefit and cost components, GPI reveals which factors cause economic welfare to rise or fall even if it does not always indicate what the driving forces are behind this. It can account for the underlying patterns of resource consumption, for example, but may not pick up the self-reinforcing evolution of markets or political power that drives change.
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Critiques of GPI and Responses
There have been a number of criticisms of GPI (Brennan, 2008, Harris, 2007, Neumayer, 2010). These include that the GPI: 1) uses inappropriate valuation methods to estimate some GPI items; 2) assumes that human-made capital and natural capital are substitutes; 3) includes some important welfare-related items but overlooks others, such as the benefits of political freedom; 4) is subjective in its choice of components to include and 5) lacks a solid theoretical basis. These criticisms are
Countries for Which GPI Has Been Estimated
GPI has been calculated for several countries and regions (Jackson and McBride, 2005, Jackson et al., 2008, Lawn and Clarke, 2008, Posner and Costanza, 2011). GPI is by no means a perfect indicator of well-being or progress, but it is a better approximation to economic welfare than GDP, which was never intended as a welfare measure. GPI estimates are often limited by the lack of appropriate social and environmental data compiled by national statistical agencies. So far, academic groups or NGOs
Methods
We performed a metadata analysis on the existing peer-reviewed literature that calculated time series GPI/capita and ISEW/capita at the national level. We found studies for 17 countries, for portions of the period between 1950 and 2010. However, methodological differences existed within the primary studies. For instance, many GPI studies used the Gini coefficient to estimate the inequality index. The U.K. and Swedish studies used the Atkinson index directly to estimate welfare loss. Some
Results
We graphed the GPI/capita for all 17 countries on one graph (Fig. 4) (all GPI data were in $U.S. 2005). Several of the 17 countries showed a similar trend of an increasing GPI/capita highly correlated with GDP/capita until at some point the GPI/capita either levels off or begins to decrease. This is primarily seen not only in European countries, but also China, and the U.S. We also graphed GDP/capita for all 17 countries (Fig. 5). For the majority of countries, GDP/capita has a continuous
Discussion
China experienced rapid GDP/capita growth between 1950 and 2008 as it moved from an agrarian to an industrialized society. GPI/capita also increased during this time, albeit more slowly. After 1994, China joined the world market more completely and its GDP/capita, along with its GPI/capita, increased rapidly. However, this only lasted for about five years after which worsening income distribution (the Gini coefficient increased from 29 to 42) and high environmental externality costs became
Global Estimates
This same pattern can be seen in the global estimate of GPI/capita (Fig. 3). At the global level, the decrease begins to occur around 1978. This decrease has occurred while global GDP/capita has steadily increased—in some countries drastically, such as China and India. This shows that although GDP growth is increasing benefits, they are being outweighed by rising inequality of income and increases in costs.
GPI is not a perfect measure of overall human well-being since it emphasizes economic
Conclusion
It is increasingly recognized that GDP was never designed as a measure of economic welfare and GDP growth is no longer an appropriate national policy goal (Costanza et al., 2009, Stiglitz et al., 2010). GPI, while certainly not perfect, is a far better approximation of economic welfare than GDP. By assembling GPI estimates and other indicators for 17 countries representing 53% of the global population, we have been able to show significant trends and differences, and to estimate a global GPI.
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